Bloomberg News

Russia Refrains From Rate Cut as Putin Craves Growth: Eco

May 10, 2012

Bank Rossii in Moscow left the refinancing rate at 8 percent, the central bank said in a statement on its website today. Photographer: Andrey Rudakov/Bloomberg

Bank Rossii in Moscow left the refinancing rate at 8 percent, the central bank said in a statement on its website today. Photographer: Andrey Rudakov/Bloomberg

Russia’s central bank refrained from cutting interest rates for a fifth month, signaling reluctance to deploy monetary stimulus after Vladimir Putin returned to the country’s presidency with the goal of accelerating growth.

Bank Rossii in Moscow indicated that containing inflation is its priority by leaving the refinancing rate at 8 percent today, in line with all 15 forecasts in a Bloomberg survey. The level of borrowing costs is “appropriate for the coming months,” the central bank said in a statement on its website.

Putin, who was sworn in for his third term as president on May 7, battled inflation during his first eight years in the Kremlin after the rate peaked at 127 percent in July 1999. The central bank is keeping its focus on prices, which may collide with the Russian leader’s goal of accelerating economic expansion to least 6 percent a year to turn the economy into one of the world’s five largest by purchasing power by 2015.

Putin is willing to support the inflation fight “to a certain degree,” Alexander Morozov, the chief economist at HSBC Holdings Plc (HSBA) in Moscow, said in an e-mail “Pressure on the central bank would likely increase if economic growth slowed to below 3 percent. Putin has expressed his satisfaction with economic growth of 4 percent given the problems in Europe.”

Investors switched to betting on interest-rate increases on April 27 for the first time in almost five months, according to forward-rate agreements tracked by Bloomberg. The contracts show borrowing costs may rise 5 basis points, or 0.05 percentage point, over the next three months, compared with expectations of as much as 31 basis points of cuts on Feb. 7.

Ruble Drops

The ruble maintained declines and traded 1.3 percent down at 30.1780 versus the dollar by 11:35 a.m. The Micex Index (VTBMICX) of 30 stocks rose 1.4 percent to 1,403.24 and was also little changed after the statement.

Russia cut inflation below Italy’s rate for the first time in March and reduced it further last month as some food prices fell. The pace of consumer-price increases slowed to 3.6 percent in April from 3.7 percent in the two previous months. That compares with 3.8 percent in Italy in March and 3.5 percent in the U.K. Bank Rossii said today it expects to reach this year’s target of holding price growth between 5 percent and 6 percent.

The central bank left the overnight auction-based repurchase rate was at 5.25 percent and the overnight deposit rate at 4 percent.

Policy makers are adding to signs that they may be “more inflation-averse” than currently perceived by the market, said Vladimir Kolychev, head of research at Societe Generale SA (GLE)’s OAO Rosbank (ROSB) in Moscow.

‘More Concern’

“We were thinking the rhetoric will soften a bit in light of the weak industrial production and fixed-asset investment data, but the central bank sounds very committed to inflation targeting,” Kolychev said by e-mail today. “Clearly, inflation is of more concern to the regulator.”

Russia last month reduced its forecast for economic expansion to 3.4 percent this year from 3.7 percent, even after increasing its estimate for Urals crude to average $115 a barrel in 2012. Gross domestic product expanded 4.3 percent in 2011 and returned to output levels last reached before a 7.8 percent contraction in 2009.

Boosting growth to 5 percent or 6 percent per year will be one of the new government’s biggest tasks, acting Finance Minister Anton Siluanov said May 7. While high oil prices from 2000-2008 enabled Russia to post an average 7 percent economic expansion, the European Union, Russia’s largest export market, is grappling with its worst economic crisis in decades just as faltering global output caps demand for crude.

Industrial Output Slows

Russian industrial-production slowed to 2 percent in March, the weakest since expansion resumed in 2009. Investment growth fell to 4.9 percent in March from a year earlier, missing forecasts and down from increases of more than 15 percent in the previous two months.

Inflation will accelerate in the second half as utility tariffs are increased and the effects of slowing food-price growth evaporate, Bank Rossii said in the statement. Inflation and poverty are seen as the biggest threats facing the country this year, according to a poll by the independent Levada Center.

Policy makers across eastern Europe are weighing economic prospects against inflation pressure as the euro area’s sovereign-debt crisis escalates. Poland yesterday unexpectedly raised its benchmark interest rate to 4.75 percent from 4.5 percent, the highest since January 2009.

Asia Export Slump

In Asia, an export slump exacerbated by Europe’s sovereign- debt crisis and an uneven recovery in the U.S. is putting pressure on policy makers to pledge stimulus measures to boost growth.

China’s exports rose less than estimated in April, while Philippine shipments unexpectedly fell in March, reports showed. Malaysia said today industrial production expanded in March at less than a fifth the pace economists predicted, a day after a report showed exports fell for the first time since 2009. Downside growth risks remain “significant,” the Bank of Korea said today as it held interest rates for an 11th meeting.

Growth prospects for export-dependent Asian nations are under threat following an inconclusive Greek election that increases the risk of a worsening European debt crisis and a slowdown in China and disappointing U.S. jobs data damp the outlook for global demand. Gains in the yuan against the dollar have ground to a halt this year, while India and Australia have lowered borrowing costs more than forecast at their most recent meetings in attempts to bolster their economies.

‘Entrenched Weakness’

“We are seeing entrenched weakness and it is going to be a bumpy ride for Asian exports” amid easing demand from Europe, said Vishnu Varathan, an economist at Mizuho Corporate Bank Ltd. in Singapore. “Our sense is that many Asian central banks have only suspended, not yet conclusively terminated, the easing cycle for this year. As external headwinds pick up, we think there will be scope for further and in most cases, modest policy easing.”

The trade deficit in the U.S. probably widened in March as imports rebounded from the biggest setback in three years, economists said before a report today.

The gap grew to $50 billion from $46 billion in February, according to the median forecast of 75 economists in a Bloomberg News survey. Another report may show first-time claims for unemployment benefits last week held close to a one-month low.

To contact the reporter on this story: Scott Rose in Moscow at rrose10@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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